The pandemic has been big business for online grocers like Instacart and their ad businesses.
Instacart is the latest e-commerce company that's trying to crack the online ad business that's dominated by Amazon. The on-demand shopping app just secured $200 million from investors including D1 Capital and Valiant Peregrine Fund that it plans to use to expand its advertising business, and it's looking to hire some 50 people in business development and sales, per its website.
Business Insider spoke with a handful of e-commerce agencies who have worked with Instacart and shared details of how the app is trying to win ad budgets.
Instacart's pitch is that it gives all advertisers equal access
Sources say Instacart differentiates its ad business from other ad sellers by giving advertisers equal access to its ad tools based on the percentage of their sales they spend on advertising. Instacart divides advertisers into five tiers as follows:
- Tier 1: Advertisers spend more than 10% of their sales on advertising.
- Tier 2: Advertisers spend between 7.5% and 10% of their sales on advertising.
- Tier 3: Advertisers spend between 5% and 7.5% of their sales on advertising.
- Tier 4: Advertisers spend between 1% and 5% of their sales on advertising.
- Tier 5: Advertisers spend less than 1% of their sales on advertising.
That means a big marketer like Coca-Cola would be on the same footing as a small local drink brand if they spend the same percent of their sales on advertising.
These tools include a self-serve ad platform that marketers use to buy ads called "featured products" that appear when people search for an item on Instacart. For example, Dole could have its ad appear in search results for "pineapple." Instacart also sells banner ads and coupons through a managed service arm.
"It's not necessarily the biggest brands that spend a lot — even smaller brands have access to these functionalities," said Stefan Jordev, advertising director at e-commerce agency Bobsled Marketing.
Instacart said that the company works with advertisers of all sizes but declined to comment on the advertising tiers.
Instacart shows how ads influence what people buy on the platform
Instacart does give perks to top-spending advertisers, though.
Instacart has an application programming interface (or API) that lets adtech firms including Kenshoo, Pacvue, and Flywheel Digital run ad campaigns for agencies, similar to deals they have with Amazon and Walmart, and only Tier 1 advertisers have access to the API, said two agency sources.
Tier 1 advertisers also get more granular data and reporting information than other advertisers do, said Sam Jennings, lead client strategist at e-commerce agency Marketplace Strategy.
For example, a report for a Tier 1 advertiser could show things like if a shopper is new to Instacart, what their first order contains, and where shoppers navigated from. Tier 1 advertisers can see if the shopper is buying a specific brand for the first time, which is similar to Amazon's advertising metric called "new to brand" that it's been pitching to advertisers over the past few years as a gauge of the brand's awareness and loyalty.
Some advertisers see Instacart's small ad business as an advantage
As more marketers use e-commerce platforms like Amazon for advertising, it's getting harder for ads to break through.
Marketplace Strategy's Jennings said that because Instacart's ad business is small, its return on ad spend — an important metric for e-commerce advertisers that calculates ads' impact on sales — is twice as high as Amazon or Walmart's.
He added that cost-per-click prices on Instacart are around 75 cents to $1.25 — up to 50% less than Amazon ad prices.
Instacart has also been hiring lots of talent from e-commerce and ad giants like Amazon, Walmart, Ascential, and Omnicom, giving it an advantage in working with brands, he said.
Recent big hires include former Amazon advertising boss Seth Dallaire as chief revenue officer and Google vet Vik Gupta as VP of engineering for advertising, for example.
"They understand the importance of building a relationship with the brands," Jennings said.
But Amazon and Walmart still dwarf Instacart
Instacart's small size can also be a challenge because it lacks the big e-commerce businesses of Walmart and Amazon that advertisers crave.
As a grocery app, Instacart sees food and beverage brands as its sweet spot. But while advertisers are looking for alternatives to Amazon like Kroger and CVS, they're still testing Instacart, said Janine Flaccavento, SVP of media and new stream media solution lead at Merkle.
She said that one of Merkle's CPG clients plans to spend more than 30% of their e-commerce advertising budgets this year with Instacart. But, she said that most clients spend less with Instacart than with Walmart because Instacart generates less sales.
Another challenge for Instacart in getting ad budgets is that it doesn't fit neatly into marketers' existing spending buckets. Instacart is trying to solve that by creating custom case studies with shopping data, said Marketplace Strategy's Jennings.
"Instacart isn't a retailer and it's not a digital marketing platform, so I think a lot of people are having a hard time figuring out where budgets come from," Jennings said.